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Privatization Mon Apr 16 2012

It's Not the Privatization, It's the Privatization

This morning a coalition of organizations opposed to Mayor Emanuel's proposed Infrastructure Trust Fund urged City Council Finance Committee members to vote on the proposal, calling it "the Great Chicago Sell-Off."

The idea of an infrastructure trust is to avoid funding needed and desirous infrastructure projects--such as public transit upkeep and expansion, building modernization, etc.--with debt. So instead of issuing general obligation bonds, attractive to borrowers because they're backed by property and other taxes the city has unlimited power to raise, the city would get private capital from wealth funds, banks, and other institutions, on the idea that the project would be administered by and in part controlled by that institutions, which would earn a return on its investment over the term of the interest.

So as a hypothetical example, the City wants to build a bus rapid transit line up and down Milwaukee Avenue. Rather than issue bonds that put the city further in debt, members of the Infrastructure Trust like, Macquarie and JP Morgan, put up $500 million to widen Milwaukee Avenue, put in the appropriate curbs, compensate the parking meter consortium for the lost spaces, buy the buses, and put in street signs and benches. In return, Trust members would be given a property interest in the BRT for a period of say 50 years, with the revenue generated either being divvied or going directly to them, either in full for the period of the agreement or up to a pre-defined ceiling that allows a nice return.

In the abstract, there's no real problem with this. We as a city don't have a lot of options. Illinois is broke beyond fixing and the federal government lost its appetite for funding major urban infrastructure projects generations ago. The general atmosphere of anti-tax hysteria makes general obligations a safe investment in theory but risky in practice. If these private institutions are willing to put up the money to develop the city's infrastructure for a similar or even slightly higher rate of return that the city would pay to bond holders, then there is no real loss to the city.

The abstract privatization isn't the problem, of course. It's the reality of it. Consider the hypothetical. In that hypothetical, the Infrastructure Trust would need to reimburse another privatizer, the consortium that bought the parking meter concession, for loss of spaces. This is a considerable cost over the life of a project. The city's agreement with that consortium tied our hands when it comes to planning our own city.

Consider in turn this story about the privatized downtown parking garages. In that agreement, the City promised not to permit competing parking garages to open up nearby. From the investor's point of view, this makes sense; they want a safe investment. From the public's point of view, it's an outrage. First of all, it's hard to see how such a promise serves the public interest, since it reduces competition for parking and thus protects a high-priced monopoly. But also, it seems like an outrageous delegation of the city's general legislative powers.

Privatization is supposed to make things more "efficient" by introducing "market-signals." In reality, however, privatization of public assets usually means binding the city's legislature--meaning us, the people--to long-term agreements that bind our ability to plan and design our city as we please, and keep us indebted to private interests, many of them with no real interest in making Chicago a better place.

A similar problem popped up with the parking meter concessionaire, too as a result of disability parking and its supposed deleterious effect on their bottom line. These agreements also tend to include arbitration agreements that are costly and keep "the City" (i.e., you and I) from going to Court over disagreements in an adversarial system that lets sunlight into operations.

Concessionaires are looking for safe, long-term investments. The more city assets they de facto control, the safer their investment, because the density of privately-controlled city infrastructure cuts into revenue generating opportunities for the city (which in turn makes it more expensive to issue bonds).

The safest investment are those that are most amenable to making a profit--more "monetizable" if you will. This inverts the rationale of infrastructure building. It's why Chicago has such a maddeningly redundant train system. The original lines were privately built, operating under charters granted by the City Council. The train operators knew the best and quickest way to make their money back was to have their train line touch the central business district, thus the creation of the Loop. But the whole point of infrastructure is not to maximize existing revenue opportunities, but to build up and out--to create new ones, even where there is risk, serving the underserved, and experimenting with new forms of infrastructure.

From a planning perspective, the concern with an Infrastructure Trust is that it privatizes our infrastructure decision-making. Rather than building and developing for the common good and to serve the underserved, we will be building and developing only where it is safe to do so, for the smallest cost for maximum return. And where such a decision may conflict with grander, more expensive, and potentially less lucrative plans, the binding, long-term agreements wins out.

As the story on the Monroe Garages indicates, these agreements are also often counter-productive. They lock the city into protecting non-competitive behavior for extremely long terms, with penalties that make forcing change or cancelling agreements costly enough to inhibit public innovation. It makes no sense for the city to agree not to permit competing parking garages, just as it made no sense for the city to guarantee the existence of parking spaces--and think how this inherently impacts the city's ability to move towards a more transit-friendly, bike-friendly planning posture. Consistent privatizing of assets creates a hodge-podge of potentially conflicting property interests owned by outside parties that keeps the city--us--from planning for a future that could, and should, look quite different from today.

From a democracy perspective, the Trust presents the twin problems accountability and transparency. Aldermen had to fight to get the Mayor to include a legislator on the body that makes decision--presumably an alderman he appoints--which does not augur well for the accountability and responsiveness of this body. It creates another appointed body immune to public pressure that further concentrates power in the person of the Mayor.

If we want a legislature that is independent of the Mayor, it'd be nice if it had some power distinct from his. With such limitless control over the Board of Education, the CTA, the CHA, and all the city's planning bodies, much of the reason the City Council can't cultivate any independence is that it has very little operational authority.

Asset privatization will create some jobs, it will modernize or improve some public assets, but it will not do so in a way that is publicly-driven, held well to account or even necessarily money-saving in a long-term sense. It isn't an inherently bad idea, particularly given the absence of lots of other options.

The problem in other words isn't privatization per se, it's privatization per quod.

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Phineas Baxandall / April 17, 2012 8:50 AM

Very thoughtful piece. The problems with "compensation" can be expected to increase over time as more and more unanticipated situations arise and city goals and planning needs shift more. The city will need to pay for a legal team to monitor, enforce and litigate the claims and counterclaims.

Roland Solinski / April 17, 2012 11:25 PM

I'm glad to hear you weigh in. I'm trying to figure out how the revenue from a transit line can possibly cover both the operating expense and the construction cost. The original L network was built privately, but the massive construction costs were only offset by all the land the private companies bought up and sold after its value increased tenfold.

To stick with your hypothetical Milwaukee Ave BRT example - unless Macquarie and JP Morgan have been secretly buying up most of Logan Square and Old Irving, they will have to recoup the bus line's cost purely with fares. How much do they think they can charge for a one-way ride? Will the contract restrict CTA such that parallel bus and rail lines can no longer operate, for fear of competition?

I think you're right that private companies will only be interested in the most monetizable areas - i.e. the North Side and downtown. What kinds of crazy restrictions will all of these contracts entail, and how will that interact with already-complex web of public infrastructure we have already set up?

This whole thing is like the Monkey's Paw... be careful what you wish for.

Tom Tresser / April 21, 2012 9:49 AM

This is just the Investment Banker Relief Act. We are just paying layers, consultants, bankers and private equity for expensive debt. It's just like going to PAYDAY LOAN STORE to get some quick cash. The investors will go to the private capital market to get THEIR funds so WE have to pay THEM AND THEIR INVESTERS -adding needless layers of profit-takers to use what is ALREADY OURS. Remember, the MorganStanley combine that owns our meters will make a profit of TEN BILLION DOLLARS over the life of that scam.

If we want to improve our city, we can (1) Elimiate fraud and corruption (esitmated at 10% of the total budget) and use THAT SAVINGS to pay down new bonds, (2) Issue new revenue bonds and raise fees or even add a percent to the city sales tax, (3) eliminate the TIF Program and re-capture the almost billion dollars sitting in those 160 TIF accounts, (4) Set up a new charity and ask Chicago's billionaires to contribute to a fund to build the city's infrastructure.

All this can be done without doing more bad deals like the PARKING METER RIP-OFF. The trust will be a run-away train that will make the City Council totally irrelevant. Do not trust the Trust. Call you alderman ASAP and tell them to reject the Trust.

Sign online petition to say NO to privatization deals @

Cody / April 24, 2012 6:29 PM

This is a very astute article -- particularly the author's observation that initiatives which decrease competition are not really privatization, especially not in it's most constructive form.

Current deals contract the public's body in to using their power to restrict competition for years to come. This is wholly different than freeing competition. Good competition would be to free up garbage collection competition, and let people choose the city's service or a private company's service. Good competition would be to break the CTA's monopoly on transit by removing the century old ban on share taxis (private, owner-driven mini-buses particularly adept at covering vast urban areas like the Southside), a ban which was originally lobbied for by streetcar companies which no longer exist. Think how many millions, even billions, could be saved just by repealing an outdated ordinance.

Privatization in its truest and most beneficial form is the opposite of guaranteed contracts.

Currently it's yet another word being commandered by those that abhor the real thing.

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